Contractor vs Employee - How do we determine whether the person doing work for us is a contractor or an employee?
This is a very important question so that you don’t get yourself in trouble with the labor department or the IRS!
Although there are other factors involved the most important question to ask yourself is whether you have control over the person or not! If you answer yes to the question of whether you have control over the person, they are likely an employee.
So, what does having control over the person exactly mean when it comes to determining contractor vs employee?
As an example, let’s use a person that cleans carpets for commercial and residential properties.
If they use your equipment, vehicle, chemicals, uniform, and only go on assignments you send them to they are most definitely your employee.
If they use their own equipment, vehicle, chemicals, uniform, and not only service accounts you send them to but also do business with accounts they originate chances are good that they are an independent contractor.
Let’s use an electrician as our next example.
If you do not allow them to do any electrical work except under your business name and billed by you, they would be considered an employee.
Don’t get this confused with a franchise owner who purchases a carpet cleaning or electrical business franchise. In these cases, the franchise generally includes the requirement to purchase specific items; therefore, the franchisee owns the equipment. The Franchisee also determines their hours of operation and can originate business on their own even if it is conducted under the franchised business name.
Why is it important to get it right when it comes to contractor vs. employee?
As a business owner you are required to pay payroll taxes, follow all federal and state employment regulations, obtain workers compensation insurance and various other requirements for any employees that you have.
If they are considered an independent contractor you would only pay them a flat fee, whatever you agreed upon, and they would be responsible for all their expenses.
There are certainly advantages to both.
For an employee you can dictate when they are to report to work, what to wear, when to take breaks, what tools to use, what procedures to follow, determine work rules, what order to do things, start stop times, and many others.
If they are an independent contractor you generally determine what the outcome should be. For instance, if you want a deck built using a specific type of material within a certain time frame you would request bids from individuals capable of doing that type of work. They would submit proposal and then you would select the person that best meets your requirements.
In your requirements you may add any specific requirements like must perform work during normal business hours, must be clean and neat, must wear something with their company logo, must follow current business or residential building codes, must use a certain grade of material, must clean up debris daily, must not drive on lawns, must follow OSHA guidelines, must carry a certain amount of insurance coverage, must be bonded, or any other requirements you see fit.
None of the above would be controlling the person in a way that would be considered an employee.
Like most things in life when everyone is happy no one says anything. However, the first time one of the parties becomes upset that is when the smelly stuff hits the fan.
So as an example, if you hire a friend and tell them they are going to be considered an independent contractor to save on all the expenses associated with an employee they may see that as a benefit. In fact, everyone seems to think this great! However, one day your friend gets hurt on the job. He comes to you and tells you that he needs to go to the doctor since it is a work-related injury. You tell them fine except that they will be responsible for the bill since they are an independent contractor. They then file a complaint with the state labor department and presto the smelly stuff then hits the fan! Open your wallet and begin to watch your money fly out of your possession.
If you don’t think a situation like this is possible it happens every single day. Just like marriages, friendships go bad and people can get really nasty.
So carefully consider whether the person you need help from is a contractor vs employee before they begin doing work for you. It may seem more expensive now but, in the end, it won’t be!
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